The Fed Blog

Thursday, May 3, 2012

China & Its Neighbors

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There are more tailwinds than headwinds blowing in China. The country’s official M-PMI rose to a 13-month high of 53.3 in April, led by the output index, which rose to 57.2, the highest since December 2010. The orders index edged down last month, but remained at a very solid reading of 54.5. The M-PMI compiled by HSBC and Markit Economics showed that manufacturing contracted for a sixth month in April with a reading of 49.3, up from 48.3 in March. The federation’s index is based on responses from managers at more than 820 companies in 28 industries, while HSBC’s covers more than 420 companies and is more weighted toward smaller businesses.

So why are industrial production and merchandise exports weakening in South Korea? The country has been somewhat of a canary in China’s coal mine, so to speak, since it exports lots of capital goods to China. Its industrial production growth has slowed significantly to only 0.3% y/y through March. Its exports dropped sharply during April, and are down 4.7% y/y.

My hunch is that China’s domestic demand is shifting from capital goods to consumer goods. The country has already slammed the brakes on its program to build more high-speed trains. Other large-scale infrastructure spending may also be cut back as more resources are devoted to improving housing and living standards for low-income workers.

That shift is likely to benefit China’s domestic manufacturers, which tend to produce consumer goods. China’s imports of capital goods from South Korea and other producers of such equipment may see less growth in China for a while. On the other hand, countries that export commodities and consumer goods to China may continue to prosper. This explains the performance of some of the major stock markets in Asia:

(1) The stock market indexes of South Korea (Kospi), Singapore (Straits Times), and Taiwan (TWSE) all have falling 200-day moving averages and are trading below last year's highs.

(2) The stock markets of Indonesia (Jakarta), Malaysia (Kuala Lumpur), Thailand (Bangkok), and The Philippines (Manila) all have rising 200-day moving averages and are trading at record highs.

(3) And what about China’s Shanghai-Shenzhen 300? It was among the worst-performing stock price indexes in the world last year, dropping 23.4%. It is performing much better this year with a gain of 12.0% so far. It is highly correlated with the price of copper, which has rebounded in the past few days.

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.